No argument with the Roy and John about the merits of the Mark III, if you incline towards the action side of bird photography, it's the best there is. But that's not your style, Peter, and with a 1D III you don't have nearly the reach you do with a 50D. Shooting the same bird from the same spot, a 50D with a 100-400 resolves more detail than a 1D III with a 500/4, if your focus is perfect and the light is good. If I was to pick the perfect bird camera for you with cost no object, it would be a 1Ds III, but I'd also consider the (as yet untried) D3x and 5D II. All three of these have around the same reach as your 350D and the two very expensive ones have the same sort of handling and auto-focus advantages as a Mark III.
But I doubt that you want to get that carried away with a credit card. Nor are you likely to be considering a change of brands. (If you were, the D300 would also be on your radar.)
So let's return to your original question: 40D or 50D? There is no contest. The 50D is easily superior to the 40D. It resolves significantly more detail and makes your lenses longer, where the 40D produces essentially the same quality you already have with a 350D. The 50D also refines and improves on the various improvements, mostly minor individually but significant n aggregate, that the 30D and 40D brought over the 20D - sensor cleaning, menu rationalisation, Live View, viewfinder, button placement, LCD screen, and so on. For bird work, and if you can afford either one, buying a 40D now that the 50D is available makes no sense at all. 50D all the way.